Econ100 Lecture6 Unemployment

8/6/2019 Econ100 Lecture6 Unemployment

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66Unemployment

IDENTIFYING UNEMPLOYMENT

General definition: the unemployed refers to

person who is available to work and currently

seeking work, but the person is without work

Categories of Unemployment Natural unemployment

Cyclical or Keynesian unemployment

Frictional unemployment

Classical unemployment

Structural unemployment


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Natural Rate of Unemployment

The natural rate of unemployment is unemployment

that does not go away on its own even in the long

run.

It is the amount of unemployment that the economy

normally experiences.


Cyclical Unemployment

Cyclical unemployment refers to the year-to-year

fluctuations in unemployment around its natural

rate.

It is associated with with short-term ups and downsof the business cycle.


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Frictional Unemployment Frictional unemployment occurs when a worker moves from

one job to another. While he searches for a job he isexperiencing frictional unemployment. This applies for freshgraduates looking for employment as well.

This is a productive part of the economy, increasing both theworker's long term welfare and economic efficiency.

It is a result of imperfect information in the labour market,because if job seekers knew that they would be employed fora particular job vacancy, almost no time would be lost ingetting a new job, eliminating this form of unemployment.


Classical Unemployment

Classical or real-wage unemployment occurs when

real wages for a job are set above the market-

clearing level.

This is often ascribed to government intervention,as with the minimum wage; or trade unions


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Structural Unemployment

This unemployment is caused by a mismatch

between jobs offered by employers and potential

workers. This may pertain to geographical location,

skills, and many other factors.

If such a mismatch exists, frictional unemploymentis likely to be more significant as well


Describing Unemployment

Two Basic Questions:

How does government measure the economys rate of

unemployment?

What problems arise in interpreting the unemploymentdata?


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How Is Unemployment Measured inVietnam?

Unemployment is measured by the GSO and

MOLISA

It surveys around 70-80,000 randomly selected

households every year.

The survey is called the Labour Force Survey.

Information collected at the time of July 01;

How Is Unemployment Measured?

US and some other OECD considers a person

an adult in working age if he or she is over 16

years old and less than the retirement ages

In Vietnam, working age is defined from 15 to

55 (for females) and 60 (for males) as

regulated by the Labour Code


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Labor Force

The labor force is the total number of people at the

working ages, including both the employed and the

unemployed.


A person in the labour force that is considered

employed if he or she has spent most of the

previous months working at a paid job.


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A person in the labour force is unemployed if

he or she is on temporary layoff, is looking for

a job, or is waiting for the start date of a new

job.

Population

In working ages (15-55/60) Out of working ages

Having ability to work Dont have ability to work

Economically active

Labour force Not in labour force

Employed Unemployed


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The unemployment rate is calculated as the

percentage of the labor force that is

unemployed.

Unemployment rate =Number unemployed

Labor force100

The labor force participation rate is the

percentage of the economically active

population that is in the labor force.



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Example 1: Employment in Vietnam

Example 2: Unemployment in ASEAN


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Example 3: US Unemployment Rate Since 1960

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4

2

01970 19751960 1965 1980 1985 1990 2005

Percent of

Labor Force

1995 2000

Natural rate of

unemployment

Unemployment rate

Example 4: US labour force participation rate


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Underemployment in Vietnam

Underemployment is an issue related to the

employed who have work for less than 35

hours/weeks.

In this regard, underemployment could be large

(but difficult to estimate) in urban areas.

In rural areas, as most of the people work inagriculture, underemployment is very high

Structure of Work in Rural Vietnam


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Household income in Rural Vietnam

Underemployment in Rural Vietnam

0 5 10 15 20 25 30 35

1996

1997

1998

1999

2000

2001

2002

2003

2004


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Does the Unemployment Rate Measure WhatWe Want It To?

It is difficult to distinguish between a person

who is unemployed and a person who is not in

the labor force.

Discouraged workers, people who would like to

work but have given up looking for jobs after

an unsuccessful search, dont show up in

unemployment statistics.

Other people may claim to be unemployed in

order to receive financial assistance, even

though they arent looking for work.

How Long Are the Unemployed withoutWork?

Varies from country to country.

In developed countries, with flexible labour

market but strong unions: could be short

In developing countries, with labour marketregidities but a lot of job opportunities: could

be short.


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Why Are There Always Some PeopleUnemployed?

In an ideal labor market, wages would adjust to

balance the supply and demand for labor,

ensuring that all workers would be fully

employed.

JOB SEARCH

Job search

the process by which workers find appropriate jobs

given their tastes and skills.

results from the fact that it takes time for qualified

individuals to be matched with appropriate jobs.


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JOB SEARCH

This unemployment is different from the other

types of unemployment.

It is not caused by a wage rate higher than

equilibrium.

It is caused by the time spent searching for the

right job.

Why Some Frictional Unemployment isInevitable

Search unemployment is inevitable because the

economy is always changing.

Changes in the composition of demand among

industries or regions are called sectoral shifts.

It takes time for workers to search for and find

jobs in new sectors.


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Public Policy and Job Search

Government programs can affect the time it

takes unemployed workers to find new jobs.

These programs include the following:

Government-run employment agencies

Public training programs

Unemployment insurance


Government-run employment agencies give out

information about job vacancies in order to

match workers and jobs more quickly.


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Public training programs aim to ease the

transition of workers from declining to growing

industries and to help disadvantaged groups

escape poverty.


Unemployment insurance is a government

program that partially protects workers

incomes when they become unemployed.

Offers workers partial protection against job losses.

Offers partial payment of former wages for a

limited time to those who are laid off.


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Unemployment insurance in Vietnam

Taking effect in Jan 2009

Unemployment insurance fund: 1% salary of workers;employers contribute 1% of total wage bill; Statecontributes another 1% (from wage bill in the statebudget)

Who is eligible: Having labour contracts of unspecified term or from 12-36

months Paying unemployment insurance for at least 12 months in

the period of 24 months before becoming unemployed

Unemployment insurance in Vietnam

60% of salary before becoming unemployed

Duration for unemployment insurance 03 months if having contract from 12-36 months;

06 months if having contract from 36-72 months;

09 months if having contract from 72-144 months;

12 months if having contract from 144 months or more;


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Problems with unemployment in Vietnam

Govt-run employment agencies are very limited inVietnam; this market is largely left for private agencies

Almost no govt-run training programs to easetransition of workers, except small program wasundertaken in association with SOE reform in the early1990; but very limited in scope

Problems with unemployment insurance

Problems with unemployment in Vietnam

Only applied for those with work contracts

It largely related to the wage-employed in

Vietnam

Refer back to structure of employment in Vietnam;

Pham and Reilly (2008): the wage employed

accounted for only one third of the labour force

Self employment in rural areas are largely left out

Even for the wage employed, the rate of contract

worker was around 70% (Pham et al. 2008)


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MINIMUM-WAGE LAWS

When the minimum wage is set above the level

that balances supply and demand, it creates

unemployment.

Figure 4 Unemployment from a Wage Above theEquilibrium Level

Quantity of

Labor

0

Surplus of labor =

Unemployment

Labor

supply

Labor

demand

Wage

Minimum

wage

LD LS

WE

LE


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Minimum wages in Vietnam (updated for 2006)

Farm labourers are subject to Decree 03/ND-CP and the

Circular 23 issued by the Ministry of Labour, War Invalids, and

Social Affairs (MOLISA), which state the minimum wage of

VND 180 thousand/month (equivalent to US$ 12.8).

For those who worked in the foreign-invested sector, the

minimum wages were fixed at VND 626 thousand per month

(or US$ 45) for foreign-invested enterprises (FIEs) located inthe urban districts of Hanoi and Ho Chi Minh City (HCMC);

VND 556 thousand/month (or US$ 40) for those located in the

rural districts of Hanoi and HCMC and urban districts of

Haiphong, Bienhoa and Vungtau; and VND487 thousand per

month (or US$35) for workers in FIEs elsewhere.

Minimum wages in Vietnam (updated for 2006)

Most recently, the minimum salary, according to the

Decree No 03/ND-CP in January 2003, rose to VND

290 thousand per month (or nearly US$ 18.7) for

workers in domestic enterprises.

Minimum wages in public sector is higher than in the

other sectors (currently regulated at 540

thousand/month, and will be increased to 620 thousand

VND)


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UNIONS AND COLLECTIVEBARGAINING

A union is a worker association that bargains

with employers over wages and working

conditions.

The process by which unions and firms agree

on the terms of employment is called collectivebargaining.


Astrike will be organized if the union and the

firm cannot reach an agreement.

A strike refers to when the union organizes a

withdrawal of labor from the firm.


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A strike makes some workers better off and

other workers worse off.

Workers in unions (insiders) reap the benefits

of collective bargaining, while workers not in

the union (outsiders) bear some of the costs.

Are Unions Good or Bad for the Economy?

Critics argue that unions cause the allocation of

labor to be inefficient and inequitable.

Wages above the competitive level reduce the

quantity of labor demanded and cause

unemployment.

Some workers benefit at the expense of other

workers.


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Are Unions Good or Bad for the Economy?

Advocates of unions contend that unions are a

necessary antidote to the market power of firms

that hire workers.

They claim that unions are important for

helping firms respond efficiently to workers

concerns.

Trade Unions in Vietnam

Labour union activities were covered by legislation

very early in Vietnam. The first Law on Trade Unions

was in effect in November 1957.

This was then replaced by a new and currentlyeffective Law on Trade Unions in 1990. Accordingly,

the trade unions are organized under the umbrella of

the Vietnam General Confederation of Labour

(VGCL).


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The legal role of VGCL was strengthened in the Labour Codewith a separate chapter on trade unions (chapter XIII).[1]VGCL is also entitled to a secondary role for theimplementation of the labour code together with MOLISA.

[1] According to the Labour Code 2002 [] in the case ofenterprises which are currently operating without a trade unionorganization, no later than six months from the date ofeffectiveness of the Labour Code, and in the case of newly-established enterprises, after six months from the date ofcommencement of operation, the local trade union and industrytrade union shall be responsible for establishing trade unionorganizations at such enterprises (article 154).


Up to 2000, VGCL had four million members, which accountedfor roughly one-tenth of the total labour force (Le et al., 2000).

Unions are commonly established in SOEs (Tenev et al., 2003)and at all levels of the administration system. However, due to

close links between the unions and the authorities, theirbargaining power is generally weak (ADB, 2004).

Outside the state sector, unionization is very limited. Accordingto Pham et al. (2002), VGCL had union organizations at anumber of 9,429 private enterprises with a total membership of687,235 workers in 2001.


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THE THEORY OF EFFICIENCYWAGES

Efficiency wages are above-equilibrium wages

paid by firms in order to increase worker

productivity.

The theory of efficiency wages states that firms

operate more efficiently if wages are above the

equilibrium level.


A firm may prefer higher than equilibrium

wages for the following reasons:

Worker Health: Better paid workers eat a better diet

and thus are more productive.

Worker Turnover: A higher paid worker is less

likely to look for another job.


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A firm may prefer higher than equilibrium

wages for the following reasons:

Worker Effort: Higher wages motivate workers to

put forward their best effort.

Worker Quality: Higher wages attract a better pool

of workers to apply for jobs.

Summary

The unemployment rate is the percentage of

those who would like to work but dont have

jobs.

The GSO calculates this statistic yearly for

urban areas.

The unemployment rate is an imperfect

measure of joblessness.


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Summary

One reason for unemployment is the time it

takes for workers to search for jobs that best

suit their tastes and skills.

A second reason why our economy always has

some unemployment is minimum-wage laws.

Minimum-wage laws raise the quantity of laborsupplied and reduce the quantity demanded.

Summary

A third reason for unemployment is the market

power of unions.

A fourth reason for unemployment is suggested

by the theory of efficiency wages.

High wages can improve worker health, lower

worker turnover, increase worker effort, and

raise worker quality.

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Econ100 Lecture6 Unemployment

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